Hindustan Zinc's special dividend credit positive for Vedanta Resources, says Moody's

Dividend will stave off some of the refinancing pressure for Vedanta whose debt maturities are scheduled for FY17

Hindustan Zinc's announcement of a special dividend is credit positive for Vedanta Resources as it staves off some of the refinancing pressure with respect to the latter's debt maturities in the fiscal year ending 31 March 2017, ratings agency Moody's Investors Service said today.

Hindustan Zinc declared a special golden jubilee dividend of Rs 24 per share, entailing an outflow of approximately Rs 12,210 crore ($1.8 billion), including a dividend distribution tax. Vedanta's 62.9 percent-owned subsidiary, Vedanta Ltd, will receive Rs Rs 6,580 crore ($982 million) of dividends for its 64.9 percent shareholding in the zinc company.

Vedanta has large debt maturities of $2.67 billion for fiscal 2017, comprising $1.50 billion at the holding company and the remaining $1.17 billion at Vedanta Ltd. and other subsidiaries. Of the $2.67 billion, $1.9 billion is due in April-July 2016 and the balance of $770 million due in the remainder of the fiscal year.

Weaker earnings and the resultant rising leverage-against the backdrop of a severe fall in commodity prices globally-and rising refinancing risk led to a three-notch downgrade of Vedanta's issuer and senior unsecured ratings on 7 March 2016, said Moody's.

The dividends of $982 million will cover over a third of the group's debt maturities in fiscal 2017 or almost 52 percent of the debt due in the April--July 2016 period, and partly alleviate near term liquidity risk.

At the same time, an estimated reduction in debt by almost $982 million, along with the company's cost reduction initiatives will drive the improvement in Vedanta's consolidated leverage by March 2017.

Vedanta will meet the rest of its fiscal 2017 debt maturities through a combination of term loans, working capital loans and the stretching of working capital. Moody's expects that Vedanta will repay the intercompany receivable to provide the holding company with the liquidity it needs to meet its debt repayments. However the company still faces material refinancing risk in fiscal 2018 and fiscal 2019 in the order of $2.7 billion and $4.3 billion respectively.

While large dividends from Hindustan Zinc is a credit positive, Vedanta's ratings and outlook are currently unaffected by the announcement of the special golden jubilee dividend. Moody's could consider revising Vedanta's ratings outlook to stable from negative, if global commodity prices recover, or if the company's profits rise to levels close to the previous highs through cost saving initiatives.